Many are perplexed by the 'strength' in Treasuries as yields collapse despite a headline payroll print propagandized (choosing to be non-believers in the bond-market's all-knowing eye). As Deutsche Bank notes, for well established reasons, a multi-decade Pavlovian response to much stronger than expected US data has been higher Treasury yields, which usually provides some USD lift. Last Friday, this plainly did not work, which proved extremely costly for many in the trading community. At a minimum Pavlov’s dog choked, but is Pavlov’s dog dead? The short answer is no, but Pavlov’s dog may have taken off the summer.

As Deutsche Bank reports,

One explanation for the surprising bond and FX response to the NFP data has been to fit the data to the market price action. This will prove wrong. The April employment was genuinely strong. The last 3 months payroll changes are all above 200K and consistent with some growth acceleration beyond weather distortions. Even the most disputable aspect of the report, the decline in the unemployment rate was achieved with a decline in participation rate, but only back to December levels. US data did not support any ‘capitulation’ from the strong US growth story.

The bad news is that it obviously did not stop a capitulation of many short Treasury and short USD trades. Which raises a couple of critical questions – how can we reconcile the price action with strong US data, and what message is the price action conveying?

Treasury resilience – 11 reasons, or 11 excuses?

A starting point is to recognize that US Treasury resilience remains central to much of what is happening to markets and currencies this year. Without flow of funds data - Q1 data is due on June 5th - we do not have a complete picture, but here are 11 explanations for Treasury solidity:

(i) The Fed was right - the 'stock' effect is more important than the ‘flow’ effect, and the Fed’s large bond holdings, particularly at the back-end, will suppress yields far into the future;

(ii) The ‘flow’ is also bullish, given the scale of Fed QE relative to the shrinking deficit/issuance; and relative to the buying from other players including:

(iii) Central bank purchases of Treasuries;

(iv) Pension funds that are underweight duration and overweight risky assets after last year’s equity gains;

(viii)The China/ BRIC/EMG impetus for global growth is still on the wane.

(ix) The Ukraine. The impact here may be subtle, at a minimum making Treasury shorts cautious.

(x) Equities reduced traction, has encouraged a global search for yield while lower vol has encouraged a shift toward carry.

(xi) Ongoing speculation of a lower terminal funds rate, including all the ‘secular stagnation’ talk.

Deutsche concludes, for some currency pairs like USD/JPY, a simple back-up in US bond yields should be a sufficient condition to see the currency follow suit. In contrast, for the USD/EM trade it is likely that something bigger is needed whereby yields break new ground either at the short or long-end to reinvigorate the short EM trade.

What remains clear is that the foundations of the strong USD story built on stronger growth and lagged inflation acceleration still stand, but that every part of this adjustment, including higher front-end yields, long-end yields higher, and curve flattening will be drawn-out, by the slow Fed tapering.

Greatest confidence remains in a view that the front-end is overly dovish by any metric, including the FOMC’s own forecast, and that this will be self evident by the end of Q3 at the latest. Pavlov’s dog choked. Pavlov’s dog is not dead, but may have taken off the summer.

Here take this IOU and I'll give you a credit note then underwrite it with a wild guess. Make sure someone markets it as a bond swap. When a sucker, I mean client, comes in with real assets give them a recipt of the transaction and take their stuff.

US Treasury ran a $250 B deficit Jan 1-Mar 31 ($700B since Oct 1 but $300 B of that was simply accounting for money spent during the previous fiscal yrs. debt ceiling farce and added to the books afterward), running a $100 B surplus since Apr 1 (aside...thus the shocking sink into a new recession...who coulda guessed???).....net net, "only" $400 B in new Treasury debt since October 1...and likely 80% in notes/bonds...or $320 B in new Note/bond

"foreigners" own $5 T in Note/bonds...they aren't selling and so far continue rolling

This means all Domestic holders of Treasury Note/Bond debt (ex-Fed) hold roughly $2.5 T...they have not been buying and have not been rolling over their Notes/Bonds yielding next to nothing. About 1/5 comes due for rollover every year (or $500 B)

So, put it together, negative new issuance, Fed buying less but their buying has more impact since there is no new issuance. they are primarily buying the rollover stock previously held by domestics (states, pensions, insurers, etc.) ..rates go down. What am I missing???

a quick looksee @ this chart tells you absent ever growing deficits, there is no "growth"...but the growth is so tepid it can't come close to keepng up with the debt created...Rubicon is crossed and now what??? Historically, the answer is false flags and war...rhyming w/ history???

Who are "The Fuckers"? Why do you folks feel the need to spite yourselves all the time? The simple answers are often the correct answers. Gold is a barbarous relic. It is not suitable for individuals to trade efficiently nor is it easy to transport or defend. No thanks, I'll keep my money in the bank where it's backed by the FDIC and ATM's are plentiful wherever I travel.

I forgot that this website is fostering a monolithic group of malcontents. Any attempt to inject a rational POV is to be considered sarcasm and dismissed with down votes =(.

The US dollar and treasuries are backed by the full faith and credit of the US government. If a false consensus is presented in online forums that there is no longer any faith in the USA should I get scared and buy out the display case of PM from my local pawn broker? No thanks, I'll stick to my MyRA and my love for the good ol USofA.

You guys can internet commando yourselves into a frenzy over what group is secretly conspiring to hurt you. PS if you think the NSA is recording eveything you say online, maybe you should be more upbeat and positive and fly under their radar. Just sayin.

PPS Sorry so many of you have hurt emotions over my MyRA recommendation. Sensitive gold bugs these days.

That 'full faith and credit' thing is all well and good if we are talking about patriotism. But when it comes to finance, you have to remember that most of the world thinks in 'dollars and sense' so to speak. Those folks HAVE no sense of patriotism, they expect to be paid back, on time, and get the promised results.

While YOUR full faith and credit might have a little leeway, (due to your patriotism) the folks we have to deal with have no such illusions. And because of that, it's a lot easier to shake that confidence. So, if we are doing something stupid financially in our own short-term interests, YOU may go out and go buy a MYRA and feel good about it. But someone over in say, China, is just going to go "WTF?" and decide to sell off what they have, and if enough folks do that, you take a hit, regardless of how good you felt about buying the thing.

We can't risk letting such a vital institution fail. My good man, if our banking institutions became insolvent, we would have anarchy in the streets and all out civil war. Now why would you want that? This forum reeks of sedition. I support the policies of "whatever it takes" to maintain our financial institutions and national strength and security.

what about creating a conflict somewhere in eastern europe , so the sheeple make up for the slack after tapering .... that sure buys some time , doesnt it ? we are going to have so many nobel price winners these year , the sweds are going to have to ask for their gold back as well ...

BOP the reason they seem to be able to taper is because as DB points out in their very first reason, it's stock that matters and not flow. so until ZH can show where stealth QE is being done. it is becoming clearer that ZH may have this wrong. It's no big dea, it's just the fundamental argument ZH has built itself on, that's all.however if markets start imploding and CB's have to react by coming back in, then that is a different story. I guess we will see soon enough. and by soon enough i mean probably way after i'm dead.

The fundamental arguement is THE FEDERAL RESERVE is broke and its a fucking JOKE? Since '08 the FED has capture mortgages and ring fenced the TBTF by jacking up long rates to fed money to its systemwide balance sheet! Now its withdrawing support and trying to get out of QE? THEY ARE DRAINING LIQUIDITY and slowing their spend which means THIS IS NEAR THE TOP OF RATES!!! Everything produced legal and illegal goes across the FED BALANCE and the FED loans it to EUROPE? Work harder/smarter DUPES!

well i certainly can't prove it. I do think the (termporarily) decreasing deficits play into this. QE provided flow, and the fed was buying up those bonds. now they own enough of the long end to control it and prevent a mutiny. I think that is plausable. It makes sense on some levels. I think they are now trying to figure out how to spark velocity. otherwise we get big problems. Velocity is out of the feds hands now. it's up to fiscal policy, and that ain't happening.

don't be surprised if the end up letting some bonds mature and roll off the balance sheet soon trying to combat imploding yields.

They gave it to their owners! EUROPE OWNS YOUR BANKING SYSTEM and fuck your government and/or its documents! You signed a pact with the devil and considering how broke dick your government was at the time U GOT A GOD DAMN GOOD DEAL! Yo! Piss boy

We have Been living on borrowed time! We were required to pay 10 trillion into a debt workout fund by raising taxes? That is the second leg of the story. Any growth will go to our overlords and they will clip and wait knowing rates sit in stone.

We attacked Iraq to keepthe oil in the ground and the FED started QE to drain liquidity not add any? The Fed elimates volocity by doing QE! IT DRAINS THE CASH YOU PUT IN TO THE MONEY SUPPLY AND CAPTURES THE INTEREST POTENTIAL what you don't get is NOTHING IS ALLOWED TO CIRCULATE. QE is like the morning after pill is to pregnancy. It stops growth from forming?

The funny thing is, the federal government issues less debt this year - so even with the tapering going on, the FED is still eating up the same ratio (or a bigger ratio!) of every new issues, as it did until now. And it has accumulated so much of the longer-dated treasuries, that the 30-yr bond became like a scarce commodity. So that's why it seems now like if stock was more important than flow - but I am not sure. If we accept that US debt is too big to be ever paid back - so if we accept that government debt is a Ponzi scheme - then flow MUST be more important than the stock accumulated so far.

How about the fact that it's a highly leveraged collateral based system, and there is more demand for collateral? Which would you rather have Spanish ten year bonds at 3% or the reserve currency of the world's bonds at 2.6%? My guess is if there is a collateral call the latter will be in a higher demand.

Good point! Let us look out on the timeline? Say US growth picks up to a place when they are both 2.5% and then USA 3% and rest 2.5% wont it create a pull into US because of better safer deal? Which is the ace in the whole as soon as our rates pass the worlds rate not just dollars will come CRAWLING! Just like they never left? And you are messing with the forces of NATURE MR. BEILE

Please, the "europeans" are buying because they have been instructed to buy treasuries.

Remember the BAILOUTS? Go have a look at the list of institutions that received the most money from the Federal Reserve. It can be found on page 131 of the GAO Audit. Notice how many banks in the E.Z. got money. Including Belgium...

And what part of "all" paper goes to fucking zero don't you understand? If your "math" is correct, then the underlying purchasing power of the paper will be destroyed exponentially faster. You really think commodity providers will keep producing and delivering if the fucking paper they get in return doesn't even begin to cover the input costs?

For generations, gold was store of value and was desirable in bad times and bank notes were desirable in good times. With the demise of the gold standard, T Bonds became store of value and would rise in bad times as stocks fell. The US will likely be the last government to fail and at that point we can expect gold to reclaim its position as ultimate store of value. The world must be filled with fear and distrust for this to happen.

My equation, questions and comments are about the intermediate term. What is happening now. I had the question and wrote the equation over a year ago and I still find it somewhat unbelievable, but today I see bond prices moving contrary to popular theory and with this theory.

The question is "What is real today and how do we make money?"

Read "the Disappearance of Money" and get a feel for time and the quantities of money that must be printed for a population to loose trust.

Yields are heading to 3.5% because of the booming back half of the year economic growth. also yields are going negative because their is no growth. as long as you understand that it's real easy to make money.

You finally scared everybody out of the bond market with epic fear meme repeated daily even x-mas for 5 full years? Even after the 30 year broke and yields started collapsing the meme of higher rates doubled down with bond porn twice a day! However last Friday was the kicker 288k and THIRTY YEAR YIELD COLLAPSED? Admit it trading bonds is tough as hell! Watch what happens when just a suggestion of higher rates hands everyone their heads again and again. What would it take for USA to reach a 15% discount rates of the early 80s Another baby boom? NO DEMAND FOR ANYTHING OTHER THAN FINANCIAL ASSETS?

You have got to get your head around the idea that the Fed is not printing its capturing! It is taking mortgages income and anything that in future has potential of being money right out the system and giving it 90% to the treasury to issue debt thus TAKING THE SHIT OUT and putting future guidance in its place? We are all the worlds hamsters and are all named Tom.

Lets say that once the titanic realized that it hit something (wall of ice) the capitian desired to reverse engines and crawl backwards from middle of the atlantic back to port. His reasoning was the water would not flood in going backwards and he new his way back home? -73 man sailed out upon an open sea- ride captain ride-

I know this pattern, have seen it before, maybe cyclically: just when you conclude the US economy is totally hosed, the rest of the world gets even more hosed, and the US economy is saved once again in spite of itself.

Anyone bullish on the economy who drank too much Recovery Koolaid can form fit the data to their bias all they want, but they always seem to leave out the structural loss of manufacturing jobs due to globalization. The US went into a depression in 2008, and you can make the case that it started in 2001, but the symptoms of that depression have been masked by insane deficit spending and Fed bubble blowing, both of which have limits. It's not even like we're going back into a recession; we're headed for the greatest depression in world history. And it's not going to be satisfying at all that the Austrians were right all along. The Fed are fools. The politicians are fools. The Keynsians are fools. And they are ruining the world. Now that they've screwed over the next generation by borrowing trillions from them to get reelected by promising MORE EVERYTHING, which is a flash in the pan that fixed nothing, why not screw over the generation after that by inventing a 50-year bond. And then when you're done with them, let's keep it rollin' with a 100-year bond. Fuck the whole future! Unborn suckers. Enslave em' all.

Here's a proposal for you. How about all the nations of the world get together and decide that men have had their chance, and from now on we're gonna give women a shot at running the joint? Men are driven by sex, money, glory, and we love to blow shit up. I'm thinking women can do better. Until, that is, the ES is pushing into the 1600s and Yellen reverses tapering and proves there are larger forces at work that supercede the individuals in power.

Here's another proposal. From now on, if you seek a job in power, you are banned from power. Instead, we have an 11 person committee and their whole job is to seek people in everyday life who have the characteristics to represent the people and make good leaders. They can choose to accept the calling, or not. Then the people vote. No more politicians by desire. You suck. You're out. I keep waiting for us to reach Peak Crazy. But the world gets crazier every year. It's the only inifinite resource we have.